Weighing vs voting – distributed ledgers as governance devices

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham The ‘forking’… Read more

more content below

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham

The ‘forking’ of Ethereum in the summer of 2016 and Bitcoin in the summer of 2017, has given us two interesting examples of the role that a consensus based system can have in resolving disputes and acting as a governance system in a quasi-legal manner.

The ‘classic’ approach to governance in negotiated contracts involves an increasing series of escalations and decision-making committees, compelled to meet, take into account certain information, and come to a decision. Those committees are bound by rules agreed in advance about the state of play. Typically, there are states of appeal, but ultimately, a single body will make a decision to resolve the dispute. The parties will have agreed if this is a private entity, such as an arbitrator, or a public servant such as a judge – but the end result is a single (or very low number of) minds voting on the right decision based on the pre-agreed rules. Typical hallmarks of this system are a private disagreement, confidential disclosures and arguments, cost-pressure to resolve the dispute speedily and amicably, and a sometimes public outcome, but which contains a small fraction of the relevant information.

This is quite straightforward to picture in a contract setting: for example, a dispute over the timeliness of an outsourced service, the supplier arguing that it was not given the necessary materials or instructions, the customer saying the supplier should have had or known these things. The first few committees cannot agree, but narrow the issues, the matter is then escalated to the account managers, who may agree the issue, or take the matter to arbitration or the court system for a third party to vote on.

The picture is muddied when we consider a far softer governance framework. The global domain name unique identifier system is run by ICANN, a non-profit organisation which was established effectively to implement U.S. Department of Commerce policy. ICANN has by-laws and committees, but was dogged for many years with ambiguity about the exact scope of its remit and authority. From 2010 onwards, pressure increased to move ICANN out of its contract and oversight from the Department of Commerce and into the ‘global multistakeholder community’. This process has been complicated and political, but, for this article, the key feature is that it required both a groundswell movement of support and lobbying, along with the consent of particular parties (such as Congress and the Department of Commerce). The end result, a ‘multistakeholder model’ still comes to decisions. It aims to do so through a ‘bottom-up’, decentralised, inclusive, process, but it still makes a binary decision – yes or no, A or B, etc..

Compare this with ethereum and bitcoin. Sweeping governance issues arose during the DAO controversy leading to the ethereum fork, and during the block size debate which led to the bitcoin fork. In each case, a public and violent debate ensued, containing everything from principled positions, to pragmatic solutions, to nasty name-calling. The decentralised, anonymous nature of these platforms, with less chance of recurring transactions with any one counterparty, make this hearty and vitriolic debate more likely than in a private governance model.

The next part however is more interesting: in effect a decision does not have to be made. The ‘classic’ governance described above requires a private agreement, or a decision to be voted on by pre-agreed categories of people using a pre-agreed system. With a distributed ledger system, anyone can put forward a solution, anyone (with a few trivial formalities) can vote on their preferred answer, and multiple ‘solutions’ to the dispute can be accepted and form the go-forward system. Take the bitcoin fork, into classic bitcoin and bitcoin cash. A dispute about block size could not be resolved with a unanimous consensus. Two prevailing views formed about the optimal block size, and the proponents of each formed a packaged ‘brand’ for their proposal. The fork eventually came, and each group moved to their preferred system. Miners and traders each vote with the electricity or their money by mining or purchasing one fork over another. This voting however is on-going, open to all, and can be done in a non-attributable way, over and over again. This makes the ‘voting’ quite different to the ‘voting’ in the previous examples. There is never a final and conclusive answer, never a holistic decision made, just a quantitative indicator of how aligned each view is with the rest of the market, and how much consensus there is for each view. It is in fact more akin to a prediction market, or a stock market – but for an idea, not an asset per se.

It will be interesting to see how this model plays out, and what other applications this form of ‘messy’ governance may have – particularly in systems which seek a ground-up consensus, and want to operate in a global manner while anticipating a changing world order.

Sitemap

Follow us

Kemp Little LLP is a limited liability partnership registered in England and Wales (registered number OC300242) and is authorised and regulated by the Solicitors Regulation Authority. Its registered office is Cheapside House, 138 Cheapside, London EC2V 6BJ. The SRA Handbook can be accessed by clicking here.